Questions and Responses

Would I be better off with an actively-managed Roth IRA mutual fund

Do I have to pay capital gains taxes on fund losses?

Previous volume

Next volume

How can I best decide which funds to sell to supplement my income?

from Michael

Q: At 60, I have a IRA portfolio of a global equity, small cap, bond and LA Affiliated A as well as an annuity. None of them has taken a large hit during the last year, rather they have pretty much languished, with the exception of the small cap which has made good gains.

On an annual basis I would like to sell some of the above to supplement my income, but in a down market or an up market, don't know the guidelines for making a decision on which to sell or to spread out the sale to all four mutual funds and/or an annuity. None of these funds would be seriously depleted by a sale of the magnitude I would anticipate. 

I guess I am asking is this: In a down or up market, assuming one has no choice but to sell some funds or makes the decision to sell funds to increase their spendable income, are there guidelines for selection for sale of a mutual fund/annuity in relation to its counter performance and reflection of the market,  or should one spread their sales over the entire portfolio?

A: (Frank)  If you are just starting to withdraw funds from your IRA, perhaps it's time to re-consider your asset allocation plan. While aggressive all equity plans may be great for the accumulation phase, they are not necessarily wonderful during withdrawals.

You may want to reduce your equity exposure in order to minimize your portfolio's volatility. And, it's a pretty good idea to fund the next five to seven years' withdrawals with short term bonds. That way you won't end up having to liquidate your volatile assets in a down market.

Once you have decided on your asset allocation plan, take your income needs from the most overfunded class. Then establish your allocation plan. After that re-balance annually to take your income and get you back to your plan.

It's delusional to believe that we can predict the future of any asset class. But, they all eventually recover after being out of favor. Periodic re-balancing will force you to sell off shares that have performed well and conserve your underperforming assets to give them time to recover. In fact, this type of withdrawal plan has us systematically selling the best recent performers. Over time this should produce an incremental advantage for you.

Would I be better off with an actively-managed Roth IRA mutual fund?

from Muggins

A: (Frank)  You didn't mention how old you are, or when you expect to use the account. So, it's hard to give any specific advice. But, almost by definition a Roth IRA is a long term investment. Unless you have a very low risk tolerance, or expect to consume the account in a very short time frame, you ought to consider investing for a higher return. 

The unspoken corollary to a guaranteed account, is that it's almost guaranteed not to grow very much. I would recommend some type of equity mutual fund with low expenses and wide diversification. Perhaps a total market index fund, or total foreign market index fund.

If you earn a 4.57% rate of return on a $2000 annual investment over 15 years, you will end up with $43,696. However, if you average 9% during the same time frame, your total accumulation will grow to $64,007. That climbs to $76,380 at 11%.

It would be a shame not to maximize the future benefit of your tax-free account. A tax advantage is a terrible thing to waste!

Do I have to pay capital gains taxes on fund losses?

from Leroy

Q: I have money in mutual funds and lost money on them. Do I still have to pay the capital gains tax? Or is there a way to deduct your losses?

A: (Greg)  The short answer is that you have to pay tax on the capital gains reported to you but you cannot deduct any losses on your mutual fund shares until you sell them. Doesn't seem fair since you probably haven't even received any money yet, but that's how it works.

At least the reporting of the capital gains and dividends is easy. Your fund manager should have given you a tax form at the end of January (called a 1099-DIV) that reports all the dividends paid by the stock owned inside the fund and capital gains realized when the fund manager buys and sells shares. You simply enter that income on your tax return, even if it was all reinvested in new fund shares and even if the value of the fund goes down.

Important Disclaimer

Investing in equities involves a serious principal risk, and no assurance can be given that the techniques described here will be successful. Returns vary and you may have a gain or loss when you sell your shares. Past performance is no guarantee of future results. Index returns shown are historical and include the change in share price, reinvestment of dividends, and capital gains. Indexes are unmanaged and do not reflect the impact of transaction costs. Transaction costs would have reduced the total returns.

International investments, especially those in emerging markets, entail greater risks (as well as greater potential rewards) than U.S. investing. These risks include political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less-established markets and economies.

Lastly, the questions and responses set forth here are for general informational purposes only and are not intended to substitute for performing your own independent research or contacting your financial or legal professional before making any investment decisions. We make no guarantees as to the performance of any investment strategy you choose and are not responsible for any losses you might incur.